Getting Started in Forex

By Richard Cox
Richard Cox
Richard Cox
May 9, 2014 Updated: April 23, 2016

Getting Started in Forex

Over the last few years, we have seen some major changes in the ways investors approach the financial markets.  In decades past, most of the attention was focused on areas like stocks, bonds, and mutual funds.  But the rise on internet-based home trading platforms has given rise to new trends in retail market and entirely new asset classes that have gained in popularity.  

Perhaps the best example of this is the currencies or foreign exchange market.  Its rise in popularity has also given rise to an entirely new trading term that was not present in recent years:  Forex.  The forex market is a truly global market, and is not bound by the same temporal or regulatory conditions that are seen in more traditional stock trading.  This makes forex trading much more flexible in nature, and it opens up the possibility for regular people (not just those active on the floor of a stock exchange) to make significant investment gains from the comfort of their own homes.

Protecting Your Account

When you first start forex trading, it is important to take certain measures to protect your account balance and to avoid unnecessary monetary losses.  The best way to start is to use a demo account, where you can actually trade virtual currency under live market conditions.  To be sure, you cannot actually make money this way, but you can learn how the forex market operates and prepare yourself for the times when you are ready to move onto live money trading.  

Another approach is to always make sure that you are using a protective stop loss for every trade.  A stop loss is essentially a market order that will close your trade is the market moves too far in the wrong direction.  For example, if you buy the NZD/USD (the New Zealand Dollar versus the US Dollar) at $0.86, you might elect to set a stop loss below $0.85.  Then, if the market starts to drop quickly your stop loss will protect your account from losing money if the overall value of the NZD/USD falls below $0.85.  Stop losses are a great way to make sure that your account balance remains healthy and that you do not encounter many of the unnecessary losses that are often absorbed by new traders.  

Maximizing Gains

Another approach that makes trading in the forex markets unique is the use of leverage.  Leverage essentially allows you to increase your position sizes so that you can maximize your trading gains.  In stock markets leverage is typically limited but in forex markets, this is not the case.  There are many forex brokers that will allow traders to increase their position sizes to as much as 500:1, which basically means that your gains have the potential to be 500 times as large.  

In any case, forex trading should be considered by those that are looking for alternative ways to profit from the price activity in financial markets.